The entitlement train wreck careens off the tracks....
The president's State of the Union address (full text) shows that he does not grasp the financial entitlement crisis. As George Will noted (see ABC post-SOTU video clip, not linked text), sequester cuts the president termed "harsh & devastating" would cut all of $85 billion (2.4 percent) from FY 2013's $3.5 TR budget, and $1.2 TR (2.7 percent) out of $4 TR in federal spending projected for the next decade. This he said despite the sequester having been the president's own idea. (WATCH THE VIDEO IN THE LINK & CATCH THE PRESIDENT LYING ABOUT THIS DURING A DEBATE WITH ROMNEY.). His idea of entitlement reform is ObamaCare, plus higher taxes on the wealthy--closing loopholes without the offsetting cut in rates that makes for growth-friendly tax reform. In stark contrast, Marco Rubio's GOP response (full text) combined compassion with financial realism.
The sins of the past forty years have finally come home to roost. Social Security & Medicare are, Michael Barone writes, caught in the twin pincers of sluggish economic growth & an inverted demographic pyramid. MB begins with a startling population growth number:
[Last week] the Census Bureau reported that the U.S. birth rate in 2011 was 63.2 per 1,000 women ages 15 to 44, the lowest ever recorded.
The US total fertility rate (TFR) fell to 1.9 in 2010, below the replacement rate of 2.1. While far higher than other Western country TFRs, it means that absent immigration the US population will decline.
Entitlement programs were built on optimistic assumptions as to economic & population growth, that have proven unrealistic:
When Medicare was established in 1965 and when Social Security was vastly expanded in 1972, America was accustomed to the high birth rates of the post–World War II Baby Boom. It was widely assumed that the Baby Boomers would soon produce a new baby boom of their own.
Oops. The birth rate fell from the peak of 122.7 in 1957 to 68.8 in 1973 and hovered around that level until 2007. The Baby Boom, we now see, was an exception to the general rule that people tend to have fewer babies as their societies become more affluent and urbanized.
If past history is a guide, slow economic growth may cut down on the number of births--kids, it seems, are expensive:
Birth rates fell sharply during the Depression of the 1930s. They have fallen significantly since the housing collapse, from 69.3 in 2007 to 63.2 in 2011. The steepest decline in births since 2007 has been among Hispanic immigrants, who were also hit hard by housing foreclosures. We don’t know whether this trend will continue.
Hark back a generation, to the first effort at significant reform of entitlements, upon the election of Ronald Reagan. At the time, the oldest Boomers were turning 35, while the youngest were but 18. The average retiree then recovered social insurance contributions in 1-/1/2 years, but had been misled by liberals in government & media to believe that everything paid out was based upon what was paid in.
Despite a 1977 Social Security tax increase that was at the time the largest in history, in 1982 the Old Age Survivors Insurance trust ran out of funds, and covering funds were transferred from the Medicare trust fund. The time was ripe to remove the "pig in a python" demographic bulge from pension calculation, by setting up a sufficient parallel tax-deductible private contribution system (as was done in the UK & Chile), so that by the time of retirement Boomers would have salted away enough to cover their needs. Existing recipients older than the Boomers could have been grandfathered. Beginning in 1995 the eligibility age could have been raised one year per every five, to reach 70 by 2015, reflecting average lifespans nearly 15 years longer than when Social Security System was set up in 1935. Benefits could have been indexed to prices, not wages, yielding huge savings over time.
Had Reagan gotten his way, there might have been a reform somewhat along these lines. But political pressure from even his own party became irresistible. So Reagan punted the issue to a commission that kicked the can down the road. The commission raised taxes, raised the eligibility age more slowly and kept benefits indexed to wages. We lasted 25 years until the financial meltdown, because the Reagan & Clinton years saw economic prosperity.
The vice of any large-scale inter-generational financial transfer program is that each generational cohort's size is the product of millions of individual decisions made for reasons unrelated to larger public good. Though benevolent in intent, this works like a Ponzi scheme: so long as new investors (new taxpayers to cover entitlement claims) are a large enough group to support the programs, they remain solvent. But when the population becomes an inverted pyramid, there are not enough new investors coming in to continue supporting the program.
Which is where we are now. When Barack Obama became president in 2009, the older boomers were about to retire, while the youngest turned 45; the Boomer "pig" had passed through the population python. And with sluggish economic growth very possibly the "new normal" and low birthrates likely here to stay, we have come to the end of the line.
Bottom Line. A generation-long slow-motion train wreck in the making has arrived. And in real life there are no pretty crash landings.
Letter from the Capitol, LFTC, Economy, Conservative Politics